Wednesday, May 21, 2008
Mid May Kitsap Real Estate Outlook
In each of these articles we try to relate knowledge of economics and news about real estate and financial markets and to apply them to benefit your decisions about buying and selling real estate in Kitsap County. Our Presidential campaign has offered a number of examples of candidates suggesting policies that will appeal to voters in spite of not agreeing with the wisdom of competitive markets and sound economic policies. Economists were critical of the candidates who advocated cutting the gas tax this summer. They criticized the candidates who advocated that provisions of NAFTA be repealed. They criticized the candidates who support the farm bill currently before Congress. You might wonder about how the economists view the current proposals to use taxpayer funds to help homeowners in financial distress.
Economists, bankers, and politicians are concerned that the current wave of foreclosures is the result of falling prices, a different mechanism than the usual misfortunes that produce foreclosures and one that provides little recourse or incentive for the homeowner to correct. Federal Reserve Chairman Ben Bernanke has given tacit approval to the Congressional bill requiring lenders to write down a portion of the current loan principal, perhaps combined with refinancing by the FHA or another lender. Noriel Roubini, an Economics professor at NYU and one of the more pessimistic voices in analysis of the real estate and credit liquidity crisis, is a forceful advocate for the bill in Congress, calling it "nationalization of mortgages". Roubini's basic argument is that banks will lose about twice as much on each loan if they have to foreclose instead of negotiating using the Congressional plan, and that the vicious cycle of loss that results will cause severe price drops and recession and will cause many banks to fail. Robert Shiller, one of the principal developers of the Case-Shiller Price index for real estate in 20 large metropolitan areas, presented an appeal to basic human compassion rather than a technical argument as his reason for advocating passage of the bill. "...it is important to consider the psychological trauma of foreclosure. No one is likely to starve or sleep on the streets as an immediate result of a foreclosure, and the authorities no longer dump a family's furniture on the sidewalk when it happens. Nonetheless, there is deep trauma."
Shiller's position led others to criticize, such as on the Economics Blog Naked Capitalism, where Yves Smith wrote, "Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20."
Others, such as economics writer Robert Samuelson at Real Clear Politics, object that the politicians merely want to be seen as "doing good", and that the program puts responsible tax payers in the position of paying off the loans of one to two million of the weakest borrowers.
This variability in economic opinion points out that the assumptions and validity of the calculations that underlie the bill are much in doubt. Although the Wall St. Journal reported that Moodys.com projects that by early 2009 some 12 million homeowners will have no or negative equity in their homes, the Congressional housing bill is projected to assist only about 500,000. No definitive analysis of the problems, costs, and benefits has yet been posted. It appears that the beneficiaries of the plan will be concentrated in a fairly small number of regions such as California, Nevada, Colorado, Arizona, Florida, Ohio and Michigan. A Wall St Journal article predicts that people don't want to stay in some of these areas anyway (such as the interior areas of California) because the location of the tracts are turning out to be bad bets for suburban growth. Commerce and development are not materializing as expected, so people might as well go back to the city. Falling prices, the distribution of adjustable rate mortgages, and the number scheduled to reset in the next 12 months could produce large numbers of foreclosures in other parts of the country, including Washington State. The Blog Calculated Risk reports that neighborhoods with a large number of foreclosures have seen much larger price drops than the average numbers in their community. Meanwhile, the Federal Reserve appears to be getting ready to raise interest rates to fight inflation. Then there's the small matter that home sales are rising (compared to last month) in California. Perhaps another downturn is coming that will revive the necessity. The information conflicts are confusing.
Still, there is little doubt that a version of the bill will soon become law. Though portions have not been finalized, the bill appears to have most of the following provisions:
Frank - Dodd Congressional Bill (still being negotiated)
- $300 Billion for FHA insured loans
- Lenders accept payoff of 85% of current appraised value
- 2nd liens must also be extinguished
- Lender issues new FHA insured 90% loan
- Owner occupied only, first mortgage issued between Jan 2005 thru Jul 2007
- Owner must certify inability to pay current mortgage
- Owner must meet 40% total debt to income ratio (with exceptions)
- 5% MIP (insurance premium) at closing
- 1.5% per year premium part of payments
- Reform Fannie Mae and Freddie Mac oversight, capital requirements, etc.
We can look at affordability as a means of seeing how close our market is to returning to its pre bubble conditions. The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. Affordability improved at the end of last year when median sales prices fell significantly. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 20% down and on a house priced at 80% of the median and obtains a 30 year fixed rate mortgage. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2001 we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 then some buyers cannot afford to purchase. Our numbers for 2008 are estimates using the latest monthly data for median prices and interest rates, and an estimated median family income for 2008. The affordability index rose to 1.16 in May from 1.02 last month. First time buyer affordability rose to 1.02 from .89 in April. There is a second graph showing month-to-month affordability progress this year. It's up and down, sort of like the tug-of-war between buyers and sellers.
| Year | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|---|---|
| Annual Average interest rate | 6.54 | 5.83 | 5.84 | 5.87 | 6.41 | 6.34 | 5.80 |
| Median Income | $52,701 | $53,160 | $53,923 | $54,582 | $58,304 | $60,719 | $65,000 |
| Median Price | $165900 | $184000 | $206900 | $250000 | $275000 | $290343 | $270000 |
| Monthly payment | $880 | $867 | $975 | $1182.43 | $1378 | $1443 | $1267 |
| Affordable payment | $1,098 | $1,108 | $1,123 | $1,137 | $1,215 | $1,265 | $1,354 |
| Affordability Index | 1.25 | 1.28 | 1.15 | 0.96 | 0.88 | 0.88 | 1.07 |
| 1st time buyer payment | $674 | $693 | $780 | $946 | $1102 | $1155 | $1014 |
| 1st time buyer affordable payment | $769 | $775 | $786 | $796 | $850 | $885 | $948 |
| 1st time buyer affordability index | 1.14 | 1.12 | 1.01 | 0.84 | 0.77 | 0.77 | .935 |
Here are the current statistics for Subject To Inspection (STI) and Active Listings (comparing the number in mid May to the number in mid April). You'll recall that STI represents a newly signed around contract prior to the buyer and seller agreeing on the home inspection. Below we show the number of STI contracts signed around in the first 2 weeks of the month. The number of STI contracts is the best gauge for telling us in near real time how many sales are occurring. Some of these sales will fall apart before they become pending sales.
| Area | STI 05/15 | STI 04/15 | Active Listings 05/15 | Active Listings 04/15 |
|---|---|---|---|---|
| S. Kitsap W. of HWY 3 | 4 | 8 | 205 | 192 |
| S. Kitsap E. of HWY 3 | 3 | 4 | 173 | 164 |
| Port Orchard | 7 | 10 | 169 | 179 |
| Retsil/Manchester | 2 | 8 | 137 | 130 |
| Seabeck/Holly | 5 | 6 | 107 | 106 |
| Chico | 4 | 1 | 32 | 35 |
| Silverdale | 6 | 7 | 126 | 125 |
| W. Bremerton | 11 | 11 | 239 | 227 |
| E. Bremerton | 9 | 4 | 122 | 116 |
| E. Central Kitsap | 5 | 3 | 178 | 167 |
| Hansville | 1 | 2 | 56 | 55 |
| Kingston | 2 | 5 | 104 | 93 |
| Port Gamble | 0 | 2 | 28 | 29 |
| Lofall | 3 | 0 | 47 | 39 |
| Finn Hill | 4 | 1 | 86 | 85 |
| Poulsbo | 7 | 2 | 156 | 156 |
| Suquamish | 1 | 2 | 45 | 38 |
| Indianola | 2 | 3 | 36 | 39 |
| Bainbridge | 12 | 6 | 273 | 262 |
| Totals | 88 | 84 | 2319 | 2237 |
The number of STI deals in May increased by 5% compared to the first two weeks in April. The activity is down 13% compared with May 2007. The number of active listings in our residential inventory increased by 4%. The inventory fell in some areas and increased in others. The ratio of sales to number of active listings remained steady at 4%. About 74% of the sales were under $400,000 (down from 82% last month) and 56% were under $300,000 (down from 69% last month). A greater proportion of higher priced homes is selling now than in the past 5 months.
Here is a graph of the mid month sti data for the past year:
May's APR is 6.226% on a 30-Year and 5.873% on a 15-Year, both Conforming. April's rates were 6.353% on a 30-Year and 5.999% on a 15-Year, both Conforming. Interest rates declined somewhat since last month - reflecting that credit markets are somewhat better. If you qualify for FHA or VA loans, these programs have become much more attractive for low downpayment buyers. Limits for FHA and conventional conforming loans have risen recently to $475,000. Check with your lender to see if you qualify. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.
Sunday, May 11, 2008
Kitsap Real Estate Market Report - April 2008
Since the start of this month the most amazing market trend has been the ability of financial markets to tolerate relatively bad economic news without collapsing. At the end of April stock markets were near their highs for the year. The TED spread, which is the difference between the 3 month Treasury bill interest rate and the 3 month LIBOR and is widely used as a measure of liquidity and the degree to which banks will lend to one another, has fallen below 1% after being higher for most of March and April. (In times of good liquidity, this spread has ranged between .1 and .5%.) During this same period, Fannie Mae reported a $2.2 billion loss, AIG reported a $7.8 billion loss, UBS reported an $11 billion loss, WaMu reported a $1.14 billion loss, and there were as well several other reported institutional losses or near bankruptcies. Apparently the sky is not falling.
A recent article by the Wall St. Journal’s David Wessel neatly summarized the current status of the mortgage crisis.
Of the 80 million houses in the U.S., about 55 million have mortgages. Of those, four million are behind on payments. Foreclosure proceedings were begun on about 1.5 million homes last year, up more than 50% from 2006. This year will be worse. The Treasury, according to presentations its officials have made recently, predicts house prices could fall another 10% to 15% before touching bottom.
Moody’s Economy.com estimates that one in roughly 12 American families with mortgages—four million in all—already owe more than the current value of their homes. They are said to be “underwater.” The firm predicts that by early 2009 nearly one in four, or 12 million, homeowners will be underwater. Most will continue to pay mortgages on time. Many won’t, and are at risk of losing their homes.
The Treasury Department has been pressuring lenders of the Hope Now Alliance to adopt uniform voluntary criteria to speed the time for qualified borrowers to modify mortgages they cannot afford. The House of Representatives has approved the bill sponsored by Rep. Barney Frank, which would provide for $300 billion to help qualified homeowners facing foreclosure on their present mortgage obtain, in exchange for lenders writing down a portion of the current mortgage, a new fixed rate mortgage insured by the FHA. A weakness of this plan, as well as for the current Treasury efforts with the Hope Now Alliance, is how to address mortgage debt owed to second or subordinate position lenders, who are generally unwilling to cooperate with the commitment of the lender in first position. This is of interest in Kitsap County, which has a higher percentage of second mortgages than most other parts of the country. A new program by Fannie Mae, to be introduced at mid year, would allow refinancing up to 120% (no cash out?) without reduction in principal of the current loan. This may hold some promise.
The fear currently being expressed by leaders in banking, government, and the press is that many homeowners will give back their homes rather than continue to pay once their mortgages are worth more than their homes. While there is anecdotal evidence that investors may be doing this to some extent, a recent LA Times article notes that for most homeowners, the falling house value will not cause them to walk away if their mortgage is affordable. These homeowners understand that housing is a long term investment. Current foreclosure problems are mostly because people don’t know what to do once the huge payment shocks of exotic mortgages finally hit. If government relief can mitigate this circumstance, it will do much to restore order in our market even as home prices continue to fall.
Housing prices tend to be strongly persistent. Sellers are reluctant to lower their prices and tend to hold on to the price they want until a willing buyer can be found. Buyers know that values are falling and therefore seek extra value at a lower price to shield themselves from equity loss in the future. Our market expresses this inability of buyers and sellers to agree on price through a falling number of sales. If we focus on inventory levels, we can predict that prices must continue to decline. Currently Kitsap County has an inventory turnover rate of about 10.7 months. In rough terms a neutral inventory is about 6 months supply of homes, so we argue that prices must fall to allow the inventory to be reduced. Falling home prices will improve affordability (bring home prices back within balance with current incomes), which is vital since the exotic mortgages that artificially propped up prices have been removed from the lender’s shelves. Shown below are graphs of inventory and inventory turnover for Kitsap County in 2007-08 - note that inventory has risen significantly since the end of 2007.
Residential Highlights
Kitsap County residential inventory in April (2301 listings) was up 6% from March and 24% higher than a year ago. The number of year to date pending sales was down 30% compared to a year ago. Pending sales were off significantly even in Poulsbo (down 16%), where pending sales have been up for over a year because of a plentiful supply of low cost new construction undercutting residential resale prices. Poulsbo was plus 7% last month and plus 32% the month before. 41 of 44 current pending sales in Poulsbo are new construction homes. The number of YTD closed sales Countywide (see graph below) is minus 25% compared to a year ago.
Prices are falling…
The median price has been falling, but April’s YTD median price ($270,000) is up just a few dollars from the median in March (see graph below). The YTD median price has fallen 5.3% from a year ago. It’s vitally important for sellers to be the most competitively priced among their competition if they want to generate an offer.
Seller expectations…
The median list price for the year remained nearly level at $349,900. Median list price was steady at about $350,000 for most of last year. It’s interesting that this number has held steady even when the median closed sale price has declined - further evidence that many sellers are holding out for a buyer at their price. The inventory turnover (total homes on the market divided by number sold last month) is 10.7 months, down from 11 months in March. A year ago this number was 6.6 months. Today a seller has a 9% chance of selling his/her home in a given month. Competitive pricing is essential, and almost every offer we see presented is negotiating on price.
The statistics for pending sales (compared to year-to-date sales last year) varied for different parts of the County. Here is a snapshot:
Bainbridge Island -54% (-54% last month)
Poulsbo -16% (+7% last month) - 41 of 44 pending are new construction. The surge in new construction sales started about a year ago.
Bremerton -31% (-32% last month)
Kingston -46% (-53% last month)
Silverdale -39% (-37% last month)
Port Orchard -37% (-39% last month)
Olalla -26% (-16% last month)
Wednesday, April 30, 2008
Kitsap regional markets in March
We have published this article monthly for over a year to explore some of the significant variations in the Kitsap Real Estate market. We try to breakout the new construction sales from the resale market in Poulsbo to give a more accurate presentation of conditions there. The descriptive comments for each area below cite year-to-date numbers.
Bainbridge Island Real Estate
Residential homes on Bainbridge Island were selling for a median price of about $647,000 at the end of March, a drop of 3.4% from a year ago. The March median price for closed sales was 4.1% higher than last month’s median price of $670,000 (this is the second consecutive significant increase in median sales price, suggesting that at this level of sales there are buyers who are willing to pay a higher price because they need to move). Kitsap County median prices have fallen 5.3% over the past year. The YTD number of Bainbridge closed sales is down 51% from a year ago, and the YTD number of pending sales is down 54%. The number of closed sales is down 26% Countywide from a year ago. The number of active listings on Bainbridge (251) is up 39% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 15.7 months, a significant increase from last month. Bainbridge Island is a strong buyers market.
Bremerton Real Estate
Statistics we refer to are for that part of Bremerton encompassing the downtown core and west to Kitsap Lake. The market for other parts of Bremerton and its suburbs should have approximately similar trends. Homes in Bremerton were selling for a YTD median price of about $175,300 at the end of March, about 14% lower than a year ago. The March median price for closed sales was 6.7% lower than the median for last month. Kitsap County median prices have fallen 5.3% over the past year. The YTD number of closed sales is down 32% from a year ago (compared to a Countywide drop of 26%), and the YTD number of pending sales is down 32% from last year. The number of active listings (251) is up 37% from a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 16.7 months, a sharp increase from last month’s 5.8 month turnover rate. Despite a significant drop in prices, sales have slowed in Bremerton from last month.
North Kitsap Real Estate
Using the example of Kingston - the largest housing market in North Kitsap - homes were selling for a median price of about $355,000 at the end of March, down about 1% from a year ago and up about 6.3% from last month. Kingston prices fluctuate more than some of the other markets because of the lower listing and sales volume. Kitsap County median prices have fallen 5.3% over the past year. The YTD number of closed sales is down 39% from a year ago, and the YTD number of pending sales is down 53%. The number of closed sales is down 26% Countywide from a year ago. The number of active listings in Kingston (93) is up 41% from a year ago and up 11 percent since last month. The inventory turnover (total homes on the market divided by number sold last month) is 18.6 months - only 5 sales closed in Kingston last month.
Poulsbo Real Estate
Statistics we refer to are for that part of Poulsbo encompassing the downtown core, from the head of Liberty Bay southeast to Ne-Si-Ka Bay, including parts north to Sawdust Hill Rd. The market for other parts of Poulsbo and its suburbs should have approximately similar trends. Homes in Poulsbo were selling for a median price of about $349,006 at the end of March, down about 7.2% from a year ago. Kitsap County median prices have fallen 5.3% over the past year. The number of closed sales YTD has fallen 3% compared to last year (a sharp decrease from last month’s plus 23%), and the number of YTD pending sales has increased 7%. This compares to a drop of 26% since a year ago for Kitsap County as a whole. A large portion of the currently pending sales is from presales at one moderately priced new construction development - homes that never appeared as active listings. The Poulsbo listing inventory (160) has risen by 47% compared to a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 7.3 months. Calculating inventory turnover in this manner is artificially low since a number of the new construction homes closing did not show as active listings. Of 48 current pending sales, 43 are new construction. Using only the 100 non-new construction active listings in Poulsbo and the 10 non new construction sales closed last month, the inventory turnover would be 10 months.
Silverdale Real Estate
Homes in Silverdale were selling for a median price of about $330,000 at the end of March, up about 4% from a year ago. However, the YTD median dropped about 15% from its value last month, so the distribution of sales is becoming more like in past years for this market. The March median closed sale of $295,000 was 11% less than a year ago. Kitsap County median prices have fallen 5.3% over the past year. The number of YTD closed sales was down 42% from a year ago, compared to a drop in closed sales of 26% for the County as a whole. The number of pending sales YTD is down 37% from a year ago. The number of active listings in Silverdale (133) is 25% higher than a year ago. The inventory turnover (total homes on the market divided by number sold last month) is 14.8 months, a sharp increase from 9.8 months in February.
Statistics not compiled or published by NWMLS
